'Today, three areas give banks a big headache -- steel, power, infrastructure.'
'Three Cs are very critical in lending -- character, capacity and collateral of the borrower.'
R Vaidyanathan, professor of finance and control at the Indian Institute of Management- Bangalore, feels, "The situation in the banking sector was worse in the late eighties and early nineties."
Professor Vaidyanathan has been on the IIM-B faculty for 34 years teaching corporate finance, investments, risk management, insurance, pensions and financial markets.
He has also been a consultant to Hindustan Unilever, Life Insurance Corporation, ITC, BPL, the World Bank, Goldman Sachs, the Shriram Group, the Dalmia Group, the finance ministry, IDBI among others.
Pprofessor Vaidyanathan, bottom, left, tells Shobha Warrier/Rediff.com about bad loans, NPAs and the future of public sector banks.
Public sector banks that were making profits till the last quarter are suddenly in the red. What is the reason behind this?
We have seen situations far worse than this, in the late eighties and the early nineties. During this period, banks were in an expansion mode with one branch opening almost every day with plenty of fanfare.
Banks had difficulty in funding and the nature of lending was also different in those days. For example, for every Rs 100, roughly Rs 40 used to go to government security and 40 per cent of the remaining Rs 60 (which is Rs 24) had to be lent only to the priority sector consisting agriculture, small industries and exports.
In the case of agriculture also, 50 per cent had to go to the small farmers and banks could charge only 6-and-a-half per cent interest. To small industries also, banks were supposed to lend only at 8-and-a half to 10 per cent interest.
When it came to lending to exporters, banks could, however, charge the normal rate of of 11 to 12 per cent interest.
A hierarchy was followed while lending the remaining Rs 36, which went to sectors like steel, atomic energy, coal, infrastructure, etc. Only in the end, they could lend to Hindustan Lever or Britannia!
The gap between the two -- weighted average lending and weighted average borrowing -- is the margin for the banks. At one point of time in the '90s, it came up to one per cent for most of the banks.
Many committees were formed to look into the issue and the percentage came down from 40 per cent to 24 to 25 per cent. Branch expansions also slowed down.
In 2002, huge amount of VRS (voluntary retirement scheme) was given to bank employees and nearly 150,000 bank employees left.
Today, the problem is banks do not have significant amount for fund rotation.
Has the 2008 economic crisis and the subsequent slowdown in the economy resulted in this situation?
2008 was more of a global crisis. Today, there are three areas that give banks a big headache -- steel, power and infrastructure. The steel sector is more or less in a better position today, with the government imposing import duty etc -- domestic steel is picking up.
In the case of energy, gas prices have significantly fallen and the energy sector is also recovering.
We know that a large number of projects were stuck in infrastructure for various reasons. Now, many infrastructure projects like roads, ports, etc are getting released because of the faster decision making process. This can be helpful to the banks.
Will this result in the entry of global players in the banking sector?
That is what I want to stress: The crisis should not be overblown to create a situation for people clamouring for global players to enter India. This is very important.
Many of the global banks are also in crisis and they are very eager to get a foothold in the Indian market.
Because of the size of the market?
Because of the size of the market and also, they would not like to start from scratch. They would like to swallow some big banks here, which I think we should not encourage.
In the process of making a hue and cry about non-performing assets and bad loans, we are making it look as if our banks are not capable enough to run.
You should remember that most of the independent directors of these banks are political appointees like retired MPs, MLAs and sidekicks of political parties. This reduces the professional capability of banks.
They influence providing credit to parties who should not be provided any such fund. They also influence writing off loans which should not be written off.
What banks need now are professionals to run them.
Will it be possible? With the kind of nexus that exists between capitalists and politicians, is it not a big decision for any government to take?
I agree with you. But from whatever signal I get, it appears this government is appointing more professionals like chartered accountants, lawyers, company secretaries, etc.
Do you consider the current situation of the public sector banks worrying?
I would not say that. It is not beyond redemption. We can easily rectify these problems.
Some people say privatisation is the answer, some say downsizing. Some want merger. What is the solution?
Privatisation, definitely, is not the answer. Our PSBs are much better than the private banks.
If you look at the data, you will see that private sector banks have also suffered a lot in NPA (non performing assets), in fact more than the public sector banks.
But lending has increased significantly for them, by 20 per cent, while lending has come down in PSBs. The status of private sector banks like ICICI Bank and HDFC Bank are unknown to the ministry also.
Some time back, they opened so many private sector banks with so much fanfare. Where are they? So many of them got merged with PSBs eventually. It is not that all private sector banks have done great.
No, they should not use this as an excuse to privatise them (banks).
Downsizing mainly means reducing the number of employees, which they did through VRS. Now there is no massive recruitment also.
There is a talk about merging 27 PSBs to make them six. Is this a right move?
Not at all. Different banks have different strengths and it is not an easy task.
Do you feel the RBI's asset quality review asking PSU banks to clean balance sheets and declare all NPAs that led to them coming into the red?
At that time, the All India Bank Officers Confederation had said such a decision would put all PSU banks in the red.
You are correct. The RBI should act with sobriety. The RBI's decision to suddenly pounce on them is not right. Every bank board has a representative from the RBI and the finance ministry. What were they doing till now? How can they wake up one day and come up with such a decision?
There is no sarvaroga nivarini (cure all) for banks. Each bank has to be tackled differently. You have to be cautious in adopting some of the Western standards blindly like the Basel norms, which is more applicable to European banks than here.
In India, it is both rule-based and relationship-based. Here, we have the smallest farmer to the richest industrialist as bank customers.
Three Cs are very critical in lending -- character, capacity and collateral of the borrower.
Everybody is not a wilful defaulter and there are honest business people too. Those who are in exports or infrastructure are finding it difficult to pay back the loans.
Even the IT companies are in the doldrums compared to what they were five years ago because the global economy has not picked up.
Ideally, the government should look at the other problems the PSBs face now. Now they have mostly people in the 55 plus age group in top positions who are going to retire in the next 5, 6 years. And there are not enough people in the 35 to 50 age group while they have many in their 20s. This is going to be a huge challenge for the banks.
After most of the PSBs declared their results, many started ringing alarm bells...
I don't think there is any need to ring alarm bells. The situation was worse in the late eighties and early nineties and we overcame that. It is not as alarming as it is made out to be!
We are not a banana republic and we have excellent people working in the banking industry.
We Indians have this habit to whip ourselves and we derive pleasure in doing that!
There is no need to push the panic button. The government should strengthen the coordination mechanism between the Enforcement Directorate, income tax department, CBI (Central Bureau of Investigation, SEBI (Securities and Exchange Board of India and RBI.
There should be swift and severe punishment for defaulters -- we should put them in jail for 50, 60 years. Even the cases of 1990 are still pending. If you punish a few, things will fall in place.
We don't need any new law for all this. Like how the election process in India changed with the arrival of one T N Seshan.
He didn't create any new law, used the old ones to instil fear in the minds of politicians. And how things changed in India!
So you feel another T N Seshan is needed to set right the banking sector?
Yes, we need another T N Seshan.